Repo rate unlikely to be changed

 Why Repo Rate may be left unchanged?

The Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) will be meeting in Mumbai from 6th to 8th December 2023 to review the policy (Repo) rate and its monetary stance.  In the present circumstances, the MPC is likely to keep the repo rate unchanged for the fifth consecutive time, after raising it by 25 bps in February 2023. 

1. Positive factors ruling out any increase in the repo rate

(i) Federal,Reserve has left its fund rate unchanged (range of 5.25% to 5.5%), for the second consecutive time, in its meeting on 2nd November 2023. 

(ii)  Average Crude oil price for the eight months ended November 2023 and for the month of November 2023 remained below USD 85 levels, the price assumed by RBI in its inflation projections.

(iii) Retail inflation, which dropped to 5.02% in September 2023, came down further to 4.87% in October 2023. 

(iv) Forex Reserves at USD 598 bn. (an increase of USD 19 bn. over March 2023) could easily cover 9-10 months import requirements. 

(v) CAD continues to be low at just 1.1% of GDP in Q1FY24 (2.1% in Q1FY 23)

(vi) GDP growth for the second quarter in FY 24 at 7.6% (7.8% in Q1), coming as a surprise since the increased lending rates from the financial sector did not impact growth, bringing in fresh confidence that the projected GDP of 6.5% for FY2023-24 is very much possible.

(vii) The fiscal deficit for the first half FY 2023-24 is recorded at 45% of the targeted estimates, as indirect and direct tax collections continues to be robust. Hence there might not be any need to increase the projected government borrowings, which if resorted to may fuel inflation.

(viii) The effect of transmission of increased repo rates into lending rates is still on and not complete. 

2.Still MPC may not reduce the repo rate: 

(a) RBI Governor statement, after the last MPC in October 2023, clearly indicated that the goal of RBI is to bring inflation under the target rate of 4% and bringing it within the permitted range of +2/-2% over 4% is not the aim. Hence, though the inflation at 4.87% is below the upper range of the inflation target, it is still 87 bps higher than the target.

(b) RBI, unhappy with the pace of growth in the unsecured loans segment (includes credit card receivables) and loans to NBFCs, which aids the unsecured loan portfolio further, recently increased the risk weights by 25% on the loans to the above segments for capital adequacy purposes. Unless the RBI is convinced that the banks have reviewed their lending strategies and are more focused on secured and priority sector lending than on the unsecured, it might not reduce the repo rate (which might be used by the banks to off-set the increase in risk weights to these segments)

So in all likelihood, MPC may continue to decide to keep the repo rate unchanged.

Regarding the monetary stance, though the net injection by RBI into the banking system has gone up in recent weeks, (ranging between Rs.1 lac cr. to Rs.2 lac cr.), no liquidity crunch is visible yet in the banking sector. Investments to Deposit ratio, as indicated in the RBI weekly statement, is above 30% (mostly in SLR securities), much higher than the statutory liquidity ratio of 18.5%.  Hence the banks can always resort to avail liquidity by disposing off/ collateralizing the excess securities. Hence the stance of "Remaining focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth", is likely to continue. 

In this regard, the next MPC meeting scheduled in February 2024, might be crucial. In my view, the MPC may do well (assuming that present trend of events continues), if it continues to leave  the repo rate unchanged in Feb 2024, though there might be political pressures on account of general elections in the first half of 2024.

So What will happen in Feb 24 meeting of MPC? Will political expediency prevail or economic prudence?  Or surprisingly both will converge to leave the repo rate unchanged? Let us wait and see.

Regards

V. Viswanathan

4th December 2023

Comments

  1. Ramesh KrishnanDecember 4, 2023 at 3:04 AM

    Nicely articulated, touching most of the pointers and aligning with the author's conjecture. Pleasurable read .

    ReplyDelete
  2. AnonymousDecember 4, 2023 at 4:24 AM

    Thank you Ramesh

    ReplyDelete
  3. SRKannanDecember 5, 2023 at 7:00 PM

    Thanks again for a lucid analysis. How about a forecast od subjective decisions. With elections due in 2024, tightening inflation would be the focus and increase of repo rate effect on investment seems less. Defaults are now par for the course.

    ReplyDelete

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